2P Reserves

2P Reserves is a term you'll frequently encounter when looking at companies in the oil, gas, and mining sectors. It stands for Proven plus Probable reserves. Think of reserves as the total amount of a resource (like oil or gold) that a company can profitably extract from the ground using current technology and under current economic conditions. The “2P” classification represents a “best estimate” of this amount. It combines the most certain reserves, known as Proven reserves (or 1P), with an additional, less certain but still likely amount, called Probable reserves. For investors, 2P reserves offer a realistic middle ground—more comprehensive than the ultra-conservative 1P figure, but far less speculative than the optimistic 3P figure (which includes Possible reserves). It's often the go-to number for analysts when trying to figure out what a resource company is truly worth.

To understand 2P, it helps to know its siblings, 1P and 3P. These classifications are all about confidence levels—how sure are we that the stuff is actually there and we can get it out?

This is the gold standard of certainty. 1P reserves are resources that geological and engineering data show with reasonable certainty (usually defined as a 90% or higher probability) can be recovered commercially. Analogy: Think of 1P reserves as the money you already have in your bank account. You know it's there, and you can access it today. It's the most conservative and reliable measure of a company's assets.

This is our star term. 2P reserves are the sum of Proven (1P) and Probable reserves. Probable reserves are those that are not yet “proven” but have a “more likely than not” chance of being recovered (typically a 50% probability or higher). Analogy: 2P is the money in your bank account (Proven) plus the annual bonus your boss has confirmed you're getting, even if the exact amount isn't finalized (Probable). It’s the figure most commonly used for company valuation because it's considered the most realistic scenario.

This is the most speculative category. 3P reserves are the sum of 2P reserves plus Possible reserves. Possible reserves have a low chance of being recovered (usually around 10%). They are based on more tenuous geological evidence. Analogy: 3P is your bank money (Proven), your likely bonus (Probable), plus a lottery ticket you bought (Possible). A value investor should treat 3P figures with extreme caution. It's a “what if everything goes perfectly?” number.

For a company that pulls resources from the earth, its reserves are everything. They are the fundamental asset that drives revenue and profit. Understanding 2P reserves is crucial for separating a potential gusher from a dry hole.

A resource company is in a constant battle against depletion. Every barrel of oil it produces reduces its reserves. Therefore, a healthy company must consistently find or acquire new reserves to replace what it sells. Tracking a company's 2P reserves over time tells you if it's winning this battle. A steadily growing or stable 2P reserve base is a great sign. A shrinking one is a major red flag, suggesting the business is slowly liquidating itself.

How do you value an oil or mining company? You start with its reserves. Analysts often use a Net Asset Value (NAV) or Net Present Value (NPV) model, which essentially calculates the present value of all future cash flows a company can generate from its reserves. Because 2P reserves represent the most likely recovery scenario, they are the most common input for these models. By looking at a company's enterprise value in relation to its 2P reserves (e.g., EV / 2P Reserves), you can get a rough idea of whether the market is pricing those assets cheaply or expensively compared to its peers.

While incredibly useful, remember that reserve figures are estimates, not facts set in stone. They are prepared by geologists and engineers and can be influenced by several changing factors:

• Commodity Prices: A sharp drop in the price of oil can make a previously “probable” oilfield uneconomical to develop, wiping those reserves off the books overnight.
• Technology: New extraction techniques, like fracking, can turn “possible” reserves into “proven” ones.
• Geology: Sometimes the initial geological models are just plain wrong.
• Politics & Regulation: A new government or environmental law can suddenly make a reserve base inaccessible.

As a savvy investor, don't take 2P figures at face value. Look for a long, consistent track record of a company replacing and growing its reserves. Be wary of huge, one-time upward revisions, and always consider the price assumptions behind the numbers.